The Role of Experience Sampling and Graphical Displays on One's Investment Risk Appetite

Management Science, 59, 323-340, 2013

35 Pages Posted: 26 May 2010 Last revised: 24 May 2013

See all articles by Christine Laudenbach

Christine Laudenbach

Goethe University Frankfurt

Martin Weber

University of Mannheim - Department of Banking and Finance

Emily Celia Haisley

Yale School of Management

Date Written: June 12, 2012

Abstract

Financial professionals have a great deal of discretion concerning how to relay information about the risk of financial products to their clients. This paper introduces a new risk tool to communicate the risk of investment products and examines how different risk presentation modes influence risk taking behavior and investors’ recall ability of the risk-return profile of financial products. We analyze four different ways of communicating risk: (i) numerical descriptions, (ii) experience sampling, (iii) graphical displays, and (iv) a combination of these formats in the ‘risk tool’. Participants receive information about a risky and a risk free fund and make an allocation between the two in an experimental investment portfolio. We find that risky allocations are elevated in both the risk tool and experience sampling conditions. Greater risky allocations in the risk tool are associated with decreased risk perception, increased confidence in the risky fund, and a lower estimation of the probability of a loss. In addition to these favorable perceptions of the risky fund, participants in the risk tool are more accurate on recall questions regarding the expected return and the probability of a loss. We find no evidence of greater dissatisfaction with returns in these conditions and observe a willingness to take on similar levels of risk in subsequent allocations.

Keywords: Risk Taking, Risk Attitude, Risk Perception, Presentation Format, Decision Comprehension, Experience-Description Gap

JEL Classification: G11

Suggested Citation

Laudenbach, Christine and Weber, Martin and Haisley, Emily Celia, The Role of Experience Sampling and Graphical Displays on One's Investment Risk Appetite (June 12, 2012). Management Science, 59, 323-340, 2013. Available at SSRN: https://ssrn.com/abstract=1616186 or http://dx.doi.org/10.2139/ssrn.1616186

Christine Laudenbach (Contact Author)

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt, 60323
Germany

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

Emily Celia Haisley

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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